Foreclosure Price vs. Appraisal

A home's foreclosure price, whether at auction or under the foreclosing lender's ownership, doesn't necessarily reflect its appraised number. An appraisal figure is the price the home is expected to sell for under normal market conditions. The foreclosure price is the lender's minimum bid at auction or what the lender is listing the home for if it doesn't sell at auction.

While exact appraisal methods vary by professional, a real estate appraiser examines the property and recent sales data for similiar properties in the same area to calculate the home's value. Properties with income potential, such as rentals, have estimated profit included in the appraisal calculations. The reason for an appraisal varies, but it's often done to prove to a lender that the borrower's home loan amount request is reasonable and a good investment.

A foreclosure usually ends in an auction of the home to the public. The highest bidder wins, but if no one bids at least the minimum price set by the lender, the lender becomes the owner. The minimum auction price is usually the balance of the loan plus other costs the lender is allowed to include under state laws, such as the foreclosure's legal costs. Unlike an appraised price, the foreclosure price doesn't usually take the home's market value into account. The lender's goal is to get back as much of the lent money as possible at auction.

Lender-owned real estate is referred to as real-estate owned, or "REO." REO property is usually foreclosed homes the lender took back at auction. The lender puts the home up for sale through the typical channels, such as a real estate agency, to get back some of the money it lost. The lender assigns a price based on the property's general condition, as established by reports from the real estate professionals involved, although the price is negotiable in many cases. REO properties are usually sold "as is," so the lender will not make repairs or make major improvements to the property's condition before the sale.

You can challenge the results of an appraisal if you think the figure is incorrect. If you paid for the report, you have the right to review it for errors and can hire another appraiser for an independent assessment. A foreclosure auction minimum price is usually not negotiable, but you can make an offer and counteroffers on a REO price as you would in a traditional real estate deal.